SGS Notes: I trust you all had a wonderful Thanksgiving weekend... If you've been following silver and gold pricing since the weekend, you know that there has been a rapid rise in price of both metals... silver is now pushing $30 per ounce spot and gold is almost at $1415 per ounce...

Shock & Awe in Precious MetalsJeff Nielson
December 1, 2010

Earlier this month, precious metals investors witnessed arguably the most concerted take-down of the precious metals sector since the Crash of ’08. First, investors were lathered-up into a mania, after World Bank head Robert Zoellick planted a piece in the Financial Times where he feigned interest in having a gold standard re-instituted.

Then the ambush took place.

This time, China was clearly participating as the ‘tag-team’ partner of the U.S. government. It began by raising reserve requirements for its banks – a move always seen as restraining the growth of an economy (and reducing commodities demand). Then the Chinese government leaked word that it was “planning interest rate increases” (even more bearish for commodities), all within the span of a couple of days.

What launched the “ambush”, however, was the utterly unprecedented move by the CME Group (owner of the Comex exchange) to radically increase margin requirements for silver halfway through a trading session. Clearly, the intent was to get precious metals investors as over-extended as possible – and then to “drop the hammer” on them at literally the best (i.e. most-damaging) moment.

This was immediately followed by yet another increase in bank reserves by China’s government, mere days after the previous reserve-increase was announced. With the U.S. having already taken radical action to curb commodities markets, it is simply not plausible that the Chinese government suddenly decided that further tightening was necessary. Instead, this was a move purely intended to generate more downside momentum in commodities by China, the world’s largest consumer of those commodities (including precious metals). And when those moves still did not generate the downward momentum desired by these market-manipulators, the CME Group announced yet another reduction of “margin” – this time for both gold and silver.

In previous years, a premeditated, orchestrated take-down of precious metals of this magnitude would derail the market for many weeks, if not months. However, that era is over.

Following the inevitable plunge of these commodities markets (as margin players were driven out), gold and silver quickly bottomed and firmed. This epitomizes the entirely different attitude of precious metals buyers. Whereas before such ambushes would create fear among investors that a “top” had occurred in the market, today all that goes through the minds of investors when precious metals go lower is “gold and silver are on sale!”

Buyers gleefully soaked-up every ounce of cheap bullion which the bullion banks chose to bestow upon them (as an early Christmas present). And now, with the month over, and “delivery” due in the Comex, those buyers are saying “give us our gold and silver.” While the numbers bounce around day-to-day, at present these buyers are wanting to take delivery on a large portion of total, available gold inventories and nearly ¾ of all available silver in Comex inventories.

Though it was the bankster cabal which launched this ‘shock’ on the precious metals market (and precious metals investors), the only ‘awe’ that was experienced was that of the banksters, themselves, as buyers are now holding out their hands and demanding that the bullion banks deliver most of their dwindling supplies of real bullion. Much like pointing a bazooka at someone – and not noticing that you were holding it backwards – this ambush has now blown up in the faces of these bankers.

If these manipulative buffoons had the slightest understanding of these markets, the spectacular failure of their attempt to (once again) “cap” precious metals would have come as no surprise. As I write regularly, anything under-priced (like precious metals) will be over-consumed. Push the price even lower, and inventories will disappear that much quicker.

The example I have used previously is chocolate bars. Price chocolate bars at 10 cents each (which was their price before 40 years of banker-produced inflation destroyed the value of our currency) and store shelves will be quickly stripped bare. Yet in the convoluted fantasy-world of the bullion banks, if they saw store shelves being cleaned-out with chocolate bars at 10 cents apiece, their “strategy” would be to attempt to kill demand by pricing them at 5 cents.

In previous years, the banksters could avoid being punished for their total ignorance of commodity fundamentals. Armed with countless tons of bullion which Western central banks had foolishly leased to them, when the cabal drove down precious metals prices and buyers stepped in to load-up, they would simply drive prices even lower (by dumping yet more bullion onto the market) – until even the most ardent bulls capitulated.

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Those days are gone, because the bullion is gone. Today, when bullion prices are driven down, and buyers step in to buy, it is the bullion banks who are now forced to capitulate. Much like a thug who points a revolver at someone – after the sixth shot is fired – the banksters now frighten no one in the precious metals market.

In the case of silver, the only “gun” now pointing at anyone is the gun which the bullion bankers are holding against their own temple (with a “silver bullet” in the chamber). As regular readers know, most of the total global stockpiles of silver (accumulated over roughly 5,000 years) are now gone. Used-up (in tiny amounts) in an infinite number of consumer and industrial goods, that silver can now never be economically recovered – unless/until the price rises to many multiples of the current price. Put another way, with gold now priced at roughly 50 times the price of silver, at some point before silver reaches $1400/oz, it will finally become valuable enough that industrial users will take measures to recover this silver, much like virtually 100% of all gold is recovered/recycled.

At the present time, the only message being sent (by the bankers) to silver’s multitude of industrial users is “silver is cheap”. With the bankers ensuring that silver is grossly under-priced, industrial demand is predictably soaring – up 18% year-over-year.

Readers must realize that these industrial users can obviously never be “frightened off” by cheap silver, but instead will simply increase their buying (as they have done). Having gotten industrial users ‘addicted’ to cheap silver, it is now up to the bullion banks to produce enough real bullion to satisfy the rabid appetite for industrial silver – or face the consequences: their own economic annihilation.

“Short” 100’s of millions of ounces of silver, JP Morgan is already facing $billions in losses on that part of their holdings, alone. However, after squandering their bullion inventories, the banksters turned to the derivatives market to use paper leverage to continue to manipulate prices.

Thanks to the CPM Group’s Jeffrey Christian, we have a rough idea of precisely how leveraged is that short position: about 100:1. So when JP Morgan starts with $billions in losses, and leverages that 100:1, the bottom-line is bankruptcy. And the harder these knuckle-draggers push-down on the market (thinking they are limiting their losses), the sooner the last bar of silver is gone – and with it, JP Morgan.

With available silver now nearly gone, we are very close to (if not already at) the point in time where industrial users make a frantic effort to buy and hoard every ounce of silver that they can lay their hands on, and soaring prices will only make them buy faster. Understand that the pretext of raising margin requirements in the silver market was to restore “order” to that market. Instead, because this move was motivated by corruption and malice rather than market fundamentals, raising margin requirements (and creating a “sale” for silver) is creating much more disorder – and rapidly setting the stage for an actual default (a fail to “deliver”) in the silver market.

It is because of this total reversal in attitudes (and the depletion of bullion inventories) that I continue to urge investors to “think like the big buyers”. They want to see bullion prices fall, because they know inventories are depleted, and any pull-backs will be shorter and shorter.

When bullion prices fall, gold and silver are “on sale”. Period. And as we are always reminded when any retailer advertises a sale, buy now – because quantities are limited.